The Impact of the European Rate Cut on Canadians

In the hopes of stimulating the lagging Eurozone economy, the European Central Bank (ECB) has cut rates to a record low of 0.5 per cent. Faced with a drop in inflation and rising unemployment, the ECB had no choice but to take measures that they hope will provide much needed liquidity in the markets. Some wanted the ECB to cut rates even deeper but the consensus was these measures are enough to revive the struggling economy. The European rate cut comes as a reminder that the world is still very much tangled in a global economic crisis that could take many more years, or perhaps decades, to unravel.

Help for Smaller Companies

When making the rate announcement at a news conference, ECB President Mario Draghi remarked, “There was a very, very strong prevailing consensus towards an interest rate cut.” He added this will help smaller companies gain access to credit, a growing problem that has stalled small business growth for several years since the economic crisis began. With smaller businesses able to borrow at a lower rate, Draghi hopes more will be able to hire workers therefore helping the EU’s growing unemployment situation,

More Cuts May Be Coming

This could be just the beginning of some major policy changes at the ECB. The Central bank is also hinting it is “technically ready” to cut its deposit rate, currently at zero per cent. This means it costs banks nothing to hold money overnight, but that could change if the ECB cuts rates to negative. This will cost banks more to do business, and would essentially force them to lend more money to help offset any costs they might incur. The move discourages people from holding cash and encourages more spending, which is good for the economy.

Canada Needs the EU

People are likely getting used to headlines about European financial woes, but this news in particular is very important for Canada. According to our government, the EU is Canada’s second largest trading partner and the world’s largest integrated economy, with more than 500 million consumers and a GDP of $17 trillion. A rate cut in the EU will mean better business activity, which could result in more trade for Canada. Also, a Canada-EU trade agreement is already in the works – if that happens it will make it easy for businesses an ocean part to work together.

What About Canadian Rate Cuts?

There’s no real indication that a rate cut is being considered for Canada, but there’s also no reason why the bank of Canada would reject it either. Canada’s unemployment rate remains relatively high at 7.2 per cent. As well, Statistics Canada recently announced a trade surplus in March, but it comes after a year of sometimes-massive trade deficits. On top of this the International Monetary Fund (IMF) is this year forecasting the weakest growth for Canada since 2008. It is strongly advising the Bank of Canada to leave interest rates low until the economy improves.

Consumers Should Keep a Close Eye

Canadians should watch the developments in Europe carefully as they do have a direct impact on our economy. In addition to EU developments, recovery has been much slower than expected for the U.S., our largest grade partner; these factors present challenges to Canada when gaining back our own full economic capacity.